Europe should hail Powell’s less aggressive tone than expected


EUROPE SHOULD WELCOME POWELL’S LESS AGGRESSIVE THAN EXPECTED TONE

by Laetitia Volga

PARIS (Reuters) – The main European stock markets are expected to rise sharply on Thursday at the opening in the wake of Wall Street the day before, after statements by the Chairman of the Federal Reserve (Fed) who, after the announcement of an increase interest rates by half a point, allayed market fears about the extent of future rate hikes.

Futures contracts on indices indicate an increase of 2.33% for the CAC 40 in Paris, 2.11% for the Dax in Frankfurt, 1.19% for the FTSE in London and 2.39% for the Euro Stoxx 50.

The U.S. central bank announced late Wednesday that it was raising its main interest rate by half a point, its biggest hike in nearly 22 years, and would start trimming its balance sheet next month.

While the institution has clearly hinted that further rate hikes will follow, its chairman, Jerome Powell, has clarified that three-quarter point hikes were not “actively” being considered by members of the Federal Open Market Committee ( FOMC), thus allaying market fears of aggressive monetary tightening.

“The Fed simply couldn’t (or, better, didn’t want to) achieve the degree of aggressiveness the market anticipated,” said Brian Daingerfield at NatWest Markets. “I don’t think it’s an overstatement to say that the Fed, for the first time in more than six months, has been surprisingly ‘dovish’ relative to market expectations.”

The central bank news is not over, with the Bank of England (BoE) due to make its monetary policy announcements at 11:00 GMT. A rate hike of 25 basis points is widely anticipated by the markets.

AT WALL STREET

After a jagged session, the New York Stock Exchange ended up sharply on Wednesday after the Fed’s announcements.

The Dow Jones index gained 2.81% to 34,061.06 points and the Nasdaq Composite rose 3.19% to 12,964.86 points. The S&P-500 gained 2.99% to 4,300.17 points, recording its highest daily percentage gain since May 18, 2020.

All the eleven main sectors of the S&P-500 progressed, in particular that of energy (+4.12%).

Bank stocks rose 3.5% as the yield on two-year US Treasuries hit a new high since November 2018, at 2.844%, before falling 13 basis points.

Futures contracts on indices are giving an opening close to equilibrium for the moment.

IN ASIA

The Japanese markets remain closed but the stock markets of mainland China, which had been closed since Friday for the Labor Day holiday, are benefiting from the Powell effect and the promises of support for the economy of the People’s Bank of China.

The gains are, however, to be limited by the announcement of a greater contraction in activity in the services and manufacturing sectors in April with the restrictions linked to COVID-19.

The Shanghai Composite index gained 0.71% and the CSI300 index was stable.

CHANGES

The dollar is unchanged against a basket of benchmark currencies after falling sharply the day before (-0.85%) and hitting a one-week low on Thursday on the prospect of lower-than-expected rate hikes.

The euro rose in session to 1.0641 dollars, the highest since April 27, before returning to 1.0602.

The pound sterling lost more than 0.5% against the dollar and against the euro as the BoE’s decisions approached.

“We expect the Bank of England to adopt a dovish (‘dovish’) tone in its communication with the potential negative impacts of rising energy prices on the UK economy,” said Kristina Clifton, analyst at Commonwealth Bank of Australia.

RATE

On the bond side, the yield on ten-year Treasuries rose to 2.9405% after falling Wednesday in session to 2.901% following statements by Jerome Powell.

Its German equivalent fell very slightly in the first exchanges, to 0.968%.

OIL

The oil market is up, amplifying the gains of the previous day fueled by the European Union’s proposal to include an embargo on Russian oil imports in a new package of sanctions against Moscow for the offensive launched in Ukraine.

Brent gained 1.17% to 111.43 dollars a barrel and US light crude (West Texas Intermediate, WTI) advanced 0.99% to 108.88 dollars.

(Written by Laetitia Volga, edited by Myriam Rivet)

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